Monday, September 28, 2015

Canadian Tax Primer 12: KiddieTax

No, the government has not decided to impose a tax on the number of children that you have.  In tax jargon, “kiddie tax” refers to a special tax on certain types of income “earned” by a child under the age of 18.  In general, that income is income that has been generated through the efforts of the child’s parent.  For example, the parent might have an incorporated business.  If a family trust holds shares of that corporation and receives dividends that are flowed through to a child who is under the age of 18, the dividend will be taxed as if the child paid tax at the top marginal rate of tax.

The kiddie tax applies only in respect of specific types of income.  The types of income include dividend income from private (i.e. family) corporations as well as business income derived from a business of providing goods or services to a business carried on by a relative.  In contrast, no kiddie tax applies to a dividend paid by a corporation that is listed on a stock exchange. 

The kiddie tax ceases to apply in the year that the child is 17 years old at the start of the year (i.e. the year the child turns 18).  Unless the child is a prodigy and goes to university at a young age, therefore, the kiddie tax will not apply to university-age children.  Therefore, it still makes sense to establish a family trust for the purpose of splitting family corporation income with university-age children.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.